Japanese Business Sentiment Is at Two-Year High

Japanese business sentiment hit a two-year high in December, the Bank of Japan's tankan survey showed Friday, but the data was not strong enough to change expectations that the central bank will hold off from raising interest rates next week.

Still, the data pushed up government bond yields as the solid results kept open the possibility of a rate rise in January.

The headline diffusion index (DI) for big manufacturers' sentiment was plus 25 in December, the highest since September 2004. It was slightly higher than plus 24 in the previous survey in September and matched the consensus forecast. The DI for big non-manufacturers rose to plus 22, a 15-year high.

"The results were strong, but I doubt the BOJ can raise rates next week," said Yasuo Yamamoto, a senior economist at Mizuho Research Institute. "It appears the board members want to wait and see until evidence that personal spending is rising significantly," he said. "There are worries that economic data for November will be weak. The BOJ would want to confirm those figures, along with data for December, and consider a move in January."

The index is calculated by subtracting the percentage of companies that consider conditions to be unfavorable from those that consider them favorable. A positive number means optimists outnumber pessimists.

The March index for big manufacturers was seen at plus 22, showing firms are slightly less positive about conditions over the next three months.

The 10-year JGB yield jumped 4.5 basis points to 1.665% after the tankan's release, moving away from a nine-month low of 1.585% hit earlier this month. The yen was little changed against the dollar.

Solid Capex Plans

The tankan, meaning short-term economic outlook, also showed big firms expect their capital spending to rise 12.4% in the year ending next March, also a 15-year high, compared with the market's median forecast for a 12.2% rise.

The figure was up 0.8 percentage point from the previous survey in September. But big manufacturers slightly revised down their spending plan by 0.3 percentage point to a 16.5% increase, the first downward revision in four years for a December survey.

Companies tend to refrain from drastically changing their capital spending plans at the December tankan, which comes after the release of their earnings for the April-September first half and a few months ahead of the end of the financial year in the following March.

A recent batch of weak economic data has heightened market expectations that the BOJ will skip raising rates at a policy meeting ending next Tuesday and wait until early next year to hike the overnight call rate target to 0.50% from 0.25%.

Many market traders had said the tankan would need to be surprisingly strong for the BOJ to defy such expectations and tighten credit at the two-day policy meeting.

The BOJ has kept monetary policy on hold since raising its overnight call rate target to 0.25% from zero in July, the first rate rise in six years.